As we move into the final two months of the year, it is hard not to draw a comparison with the last quarter of 2018. A year ago, stock markets around the world cracked and fell sharply right up till end of December. While the FTSE 100 ended the quarter 10% lower, in the US, Wall Street was 14% down over the same period.
As we look to position our our investments for the final quarter of 2019, we would like to share some thoughts with all you about the global markets.
Markets have progressively deteriorated in 2019, just as they did in 2018. The first quarter saw a dramatic reversal of the fourth quarter’s slump and the second three months built on that strong start. Since the middle of the year, however, the main indices have run out of steam, hence the question about whether Q4 of 2019 could be similar to Q4 2018.
This year, multiple downbeat economic data releases have confirmed that trade is no longer just a potential threat but a clear and present danger. Furthermore, it is particularly concerning that the manufacturing slowdown that you might expect because of trade tariffs is also starting to bite the more important service sector.In the Bank of America’s most recent fund manager survey, 38% of investors said the Trade War was the new norm, with no resolution likely for the foreseeable future.
To put things into some perspective, most of China’s exports go to countries other than the US, making it more resilient than what Donald Trump possibly thinks it is. The US is also no doubt a big, self-contained economy, making it much better placed than the likes of Germany and Japan, which have become more and more exposed to trade in recent years. Numerically, the impact of a 1 percentage point reduction in world trade is today twice as great in Germany/Japan as it was in 2000 according to Fathom Consulting. We don't really see a positive outcome from the trade negotiations as neither US or China are showing signs of any meaningful compromise.
The economic situation may look similar, but the monetary policy backdrop is very different. A year ago, it was not hard to see why central banks found it it was desirable to normalise policy and hike rates after a decade of extraordinary stimulus. However, this year, the Fed seems to have taken a complete U. The US central bank cut interest rates twice in the third quarter and it looks more and more likely to deliver further stimulus at the end of the month. Before the disappointing US manufacturing data came out, the probability of an October rate cut implied in the futures markets was 38%. Today it i 64%. The implications of Feds dovish stance has global implications, as there were 43 interest rate cuts around the world in September putting central banks back on the easing track.
We believe the geopolitical uncertainties will continue to weigh in on markets, which could mean another quarter of negative market returns. We believe investors will continue to rebalance their portfolios towards the end of 2019 and hide into cash, bitcoin and gold to make the most out of market turmoil.
Head of Investment Research